The calm after the storm continued yesterday, with the market edging lower on the session, but maybe it’s the calm before the storm. Friday’s sessions have already been wild, but with options expiration, it could be even wilder. Note: if there is an overreaction, the good news is you should be buying into the close.

Light Volume High Anxiety

Decliners dwarfed advancers, and the down volume doubled the up, but the overall volume was very light.

Market Breadth	NYSE	NASDAQ
Advancers	938	1,943
Decliners	2,280	2,617
New Highs	18	25
New Lows	176	266
Up Volume	1.58 billion	1.92 billion
Down Volume	2.86 billion	2.87 billion

3900 Held

The S&P 500 Large Cap Index held again, but how much longer? And investors expect 3,900 to hold as support. The inability to hold doesn’t automatically mean a retest of 3,600, but 3,750 would have to hold.

Heat Map

Two sectors were higher, including Financials (XLF), which might be attracting buyers on higher yields.  The sector was supposed to co-lead the market in 2022, along with Energy (XLE). The latter lived up to the hype.

It really is intriguing, and I’m surprised Financials did well yesterday, led by the big players.

Buying the Dip

On Wednesday, retail investors poured $2.0 billion into the market after that massive Consumer Price Index (CPI)-triggered panic selling. At the same time, individual investor bullishness leaped to 26.1% in the past week, perhaps on the hunch the session with 99% of components finished lower was a kind of capitulation.

Don’t Look Now

After retail sales and other economic releases, the Atlanta Fed marked down its third quarter (3Q) Gross Domestic Product (GDP) forecast to +0.5% from 1.4%. It was 2.6% a few weeks ago.

And the Hits Keep Coming

After the bell, there was a monster earnings warning from FedEx (FDX), which, for many serves as a proxy for the health of the U.S. economy:

• First quarter 2023 (1Q23) $3.44 from $5.14
• Second quarter 2023 (2Q23) $2.75 from $5.48
• The Fiscal year 2023 (FY23) ‘No Guidance’

The stock was immediately smashed. What’s worrisome is it was just June 29^th when management had mostly good things to say during a shareholders’ meeting titled:

FedEx Presents “Deliver Today, Innovate for Tomorrow” Strategy

If the economy is deteriorating as fast as FedEx suggests, Powell & Co might have to consider rate cuts.  I’m only half joking because the situation is no joke.

Portfolio Approach

There are no sector weighting changes this morning. 

Today’s Session

The ten-year and two-year curve is now screaming recession. All eyes on the ten-year and three-month curve, which is close, and the grouping preferred by Powell.

Waiting for the Michigan Sentiment report, which I think will see a noticeable decline in inflation expectations, which would be par for the course of late.

But I’m worried the Fed is so invested in acting tough, and not making a mistake, like pausing, they will fight to the wrong battle yet again.

Because it’s clear the shift must be with guarding against a deep recession.

 

Comments

Agree with Charles totally, and I believe Cathie Wood's comments about the Fed sending us into deflation are spot on. The saying goes that the road to hell is paved with good intentions so we are at a point based on the Feds wrong-headed focus that we are headed to hell so get your hot dogs ready for the cookout... Ray Weldon on 9/16/2022 10:19:18 AM

"DB inflation forecasts" "CPE" Remember not all of us are sophisticated Wall Streeters. A simple interpretation of abbreviations would be most helpful. Thanks. Donald Gullickson on 9/16/2022 10:54:11 AM

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